Doing Business as a Limited Liability Company

Introduction

Limited liability companies offer investors and business owners a new alternative
for doing business. Although limited liability companies have existed in some
states for more than ten years, they did not become popular until the Internal
Revenue Service began to tax them as partnerships rather than as corporations.
Limited liability companies provide the limited liability of corporations without
many of the corporate formalities. Potential users of limited liability companies
include:

Start-up businesses

Estate planners

Venture capital organizations

Joint
ventures

Real estate ventures

Subsidiary companies

You should consider
forming a limited liability company whenever you start a new venture or restructure
an existing business. The benefits of limited liability companies include their
favorable tax treatment, limited liability, flexible management, and relaxed
formality. This pamphlet explains how to organize a limited liability company
with the advice of your lawyer. The legal work is relatively inexpensive and
will help you to avoid problems and pitfalls that await those who are not advised
by legal counsel.

Forming the Company

In most states, a limited liability company is formed by filing a simple form
of articles of organization with the secretary of state. The articles must include
such information as the name of the company and its organizers, the address of
the company's office, and the date on which the company is to be dissolved. The
articles may also contain provisions appointing individuals to manage the company,
creating obligations for owners to contribute capital to the company, limiting
the authority of owners to bind the company, and other information desired by
the owners.

The members of a limited liability company usually enter into an operating agreement
to govern the company's internal affairs. The operating agreement of a limited
liability company is similar to the bylaws and shareholders' agreement of a corporation
or to a partnership agreement. The agreement remains confidential since it is
not filed with the secretary of state. Operating agreements typically cover capital
contributions, allocation of profits and losses, distribution of earnings, management,
transfer of investment, and dissolution of the company.

In some states two or more persons must sign the articles of organization and
the operating agreement. Most states require that limited liability companies
be owned by at least two persons. The owners of the company can be individuals,
partnerships, trusts or corporations. Your lawyer can help you plan how to satisfy
these organizational and ownership requirements, prepare articles of organization
and an operating agreement, and register the company in each state where it plans
to conduct business.

Naming the Company

State laws require that the name of a limited liability company include the words "limited
liability company," the abbreviation "LLC" or a similar notation of limited liability.
The name of the company must differ from that of existing businesses to avoid
conflicts with the names of other companies and partnerships. The process of
naming the company ordinarily includes reserving a name with the secretary of
state and then filing articles of organization using the name.

The process of naming the company can also include state and federal trademark
registration if the name will be used on the company's products or associated
with the company's services. A federal registration provides nationwide protection
while state registration only protects against persons who infringe upon the
name in the state of registration. Although registration is not legally required,
it can provide a strategic advantage in the event of a dispute and it will also
discourage others from using the name.

Your lawyer can help your company select, register and protect its business name.
If your business name is important to you, your lawyer can take steps to protect
it from use by others.

Financing the Company

The laws of most states allow the members of a limited liability company to make
their investment in the form of cash, notes, property, or services. Rather than
shares in a corporation, an investment in a limited liability company is often
represented by certificates of membership interest. Profits and losses are allocated
among the owners as provided in the company's articles of organization or operating
agreement. These documents will be carefully prepared by your lawyer to provide
the capital contributions and profit sharing that you want for your company.

The company may also borrow money from lenders and purchase from suppliers on
credit terms. Generally, the owners and managers of the company are not personally
liable for the company's debts. However, there are situations where owners and
managers can become responsible for company obligations. For example, an owner
who guarantees a loan may be forced to pay the lender if the company fails to
repay the loan. Your lawyer can advise you how to avoid personal liability for
company debts.

Doing Business in Other States

A company conducting business
in a state other than the one in which it was organized must comply with
that state's requirements for foreign limited liability companies. A
company ordinarily must have a registered agent for service of process,
file an annual report, and pay an annual fee. Companies usually do not
need to register in other states if they engage in a single job or contract.
Registration in a foreign state will be required if your company has
an office or has numerous contacts over an extended period of time.

Failure to register can result in drastic consequences. Companies that fail to
register may not start lawsuits or enforce their contracts. The company can also
be held liable for significant taxes, fines and penalties.

Your lawyer can advise whether your company's activities require registration
to do business in any states outside your state of organization. Your lawyer
can also suggest the name of a person to use as your registered agent for service
of process for each state in which your company is doing business.

Tax Aspects

Properly structured limited liability companies are not subject to state or federal
income tax. Instead, the owners of the company pay tax on its income as if it
were a partnership.

In addition to the requirements of state law, a limited liability company must
meet certain tests established by the Internal Revenue Service to assure that
it will be taxable like a partnership. The tax regulations require that the company
avoid continued existence, free transferability of interests and centralized
management.

A lawyer can help you to draft your company's organizational documents to satisfy
the requirements of the Internal Revenue Service. For example, to avoid a claim
of free transferability of interest the articles of organization or operating
agreement may require that a majority of the owners consent to an owner's sale
of an interest in the company. To avoid a claim of continued existence, the LLC
may require a vote to continue the company after the death of an owner. To avoid
a finding of centralized management, the articles of association can provide
that at least 80 percent of the members must approve fundamental decisions affecting
the company.

Another tax benefit of a limited liability company is the treatment of capital
contributions to the company. As a general rule, investments in the company do
not result in any tax on the company or its owners. In addition, the company
may generally distribute cash or property to its owners without tax consequences.

Comparison to Subchapter Companies

The laws for limited liability companies are less burdensome than the state corporation
statutes and stringent tax laws that govern Subchapter S corporations. As a result,
Subchapter S corporations have administrative requirements and costs that do
not apply to limited liability companies. For example, any person or company
may own an interest in a limited liability company while Subchapter S corporations
may not have shareholders that are corporations, nonresident aliens, or partnerships.
Owners of limited liability companies also have greater ability to allocate income
and losses in their taxes than shareholders of a Subchapter S corporation. Your
lawyer can advise how to use the tax advantages of a limited liability company.

Conclusion

Limited liability companies are gaining widespread acceptance and many experts
believe that they will become the preferred way of operating for both small and
large businesses. Unlike a limited partnership, a limited liability company allows,
owners to participate in the management of the business. Unlike a corporation,
a limited liability company does not require formal rituals like director and
shareholder meetings. Your lawyer can help you to use a limited liability company
to start a new venture or to simplify the structure of an existing business.

Formation Checklist

Uses
for limited liability company

New Venture

Conversion of existing corporation

Conversion of existing partnership

Estate planning

Joint ventures

Subsidiary companies

Taxes for company and owners

Treatment as partnership

Investment in company

Profits and losses

Distributions

Starting up the company

Articles of organization

Operating agreement

Organizers

Owners

Name

Registered agent

Registered office

Qualifying to do business

Managing
the company

Owners' authority

Delegation to managers

Duties

Limitation of liability of owners and managers

Indemnification of owners and managers

Power of attorney

Decision making

Managers

Voting by owners

Recordkeeping

Organizational documents

Bookkeeping records

Tax records

Inspection by owners

Financing

Capital contributions

Loans

Guarantees

Sharing of profits and losses

Ownership

Sale of interests

Consents to transfers

Rights to receive distributions

Right to vote

This pamphlet provides general
information. Laws develop over time and differ from state to state. This
pamphlet does not provide legal advice about specific legal problems. Let
us advise you about your particular situation.